Transcript Document

Continuing Professional Development Course
for Directors of Investment Companies
and Investment Funds
February 16th 2015
Mirabella –
Brief Introduction
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Part of Cordium Group
Mirabella is a Regulatory Hosting firm.
Located in London (2003) and Sliema (2014)
$3b in AuM (all assets incl AIFs)
37 Appointed Representatives/Tied Agents (MiFID)
Full Scope AIFM in Malta
Sub-Threshold (de minimus) in UK, soon to be Full Scope.
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Corporate Governance
o Evolution and difficult market environment
o Scandals and Crises
o Political and Regulatory
o Role in global crisis
o Real or just political perception?
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Risk Management
o Competence and Skillsets
o Risk Officers
o Board Members
o Fund’s Board
o Better level of understanding of derivative risk and fund’s
investment strategies is needed
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Action Points and Ideas
Better understanding of Valuation Process / Pricing risk
Under the AIFMD, responsibility for valuation is assigned to the designated AIFM, presenting a different
approach to offshore jurisdictions, where primary responsibility for valuation sits with the board of
directors.
o Areas for consideration by directors:
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Are you confident that you can fulfil your responsibilities in relation to valuations?
Can you properly oversee the risk management function on this task?
Do you have expertise in understanding the pricing models used to value the fund’s assets?
Have you considered the advantages of a risk-based approach to valuation oversight?
Have you considered where valuation risks will arise in the new AIF operating models, e.g. where reliance is
placed on external valuers?
Are you aware of the importance of a Valuation Committee to support ongoing oversight of AIF valuations
including challenging the proper implementation of valuation policies and procedures?
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Action Points and Ideas (2)
Better reporting structure:
The investment management report:
o description of liquidity profile of the fund including
o estimates of time required to liquidate all positions in the fund,
o a liquidity analysis relative to the redemption provisions of the fund, and
o highlighting any positions that have become illiquid since the last investment
management report;
o description of risk profile of the fund
o description of investment manager’s views of economic and market conditions and how
the fund’s portfolio is positioned to take advantage of such market conditions;
o any compliance matters including any breaches and remedial action taken or to be taken
by the investment manager or any other parties involved to prevent a recurrence of any
such breaches.
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Understanding Differences between Hedge Funds
and Private Equity Risk
o The Board oversight function also relies on the ability of the
firm’s/fund Directors to understand different strategy risk profiles.
This distinction mainly relates to HFs and PE funds.
o Regulators have in general been less interested in differentiating
the risk profiles between these two sectors.
o In reality Hedge Fund and Private Equity Fund Managers require a
different approach to risk management.
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How are the two approached differently?
o In the hedge fund space (liquid), risk management is
dictated by best practice, supported by market data and
quantitative models.
o In the PE space, practitioners have been struggling with
the question on how to integrate private equity and real
assets into a more traditional risk management
framework.
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Key AIFMD Risk Sectors - Market and Capital Risk
o In a traditional risk management framework market risk
relates to portfolio losses due to changes in market
factors (prices, FX etc.) and this risk is typically measured
though VaR and Shortfall measures.
o In Private equity assets, instead, there is lack of market
price data and the treatment of market risk poses more
conceptual challenges. This has led to the development of
modified approaches like the Cash-Flow-at–Risk (CFaR) or
Investment-Capital-at-Risk (ICaR).
o Correlation
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Key AIFMD Risk Sectors - Liquidity Risk
o Market liquidity is the risk that there is not enough
demand for purchasing an asset on the market or on the
‘secondary’ market for PE transactions. This risk applies to
both HFs and PE funds.
o Risk Managers should also address Funding Liquidity risk
o In the more traditional HF world, this risk arises when the
manager is required to liquidate assets at a bad time.
o In the PE space this concept relates to capital calls and is
symmetric to the previous one.
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Key AIFMD Risk Sectors – Leverage Risk
o HF: Hedge funds use credit lines to increase the Fund
exposure and magnify investment returns. They will also
use derivatives which have internal leverage.
o PE: (a) In the PE space borrowing leverage is typically
associated to LBO transactions; and (b) debt can be also
used by the investee companies to operate their
businesses but in most of the cases it should not be
treated as leverage for the PE fund.
o There are also other sources of leverage (off balance
sheet and over-commitments).
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Some Observations About Real World Risk
o Risk is not just numbers.
It's about asking RELEVANT questions and understanding
the answers. Not just TICKING BOXES.
o Known Unknowns
It's about knowing when you don’t know, and assessing
how dangerous that is.
An Recent example – The Swiss Franc
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Swiss Franc vs Euro (Feb 2010 – Feb 2015)
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How can you learn from this?
o What should you ask the portfolio managers?
o What keeps you up at night?
o What’s the worst possible scenario for the fund?
o If you had an additional research budget of $100,000 what
would you spend it on?
o How do you assess the performance of, and then pay your risk
officer?
o Why are you successfully raising money? OR …. Why are you
not raising money at present? (choose whichever one is true)
o Who in your organisation can you not afford to lose? Why?
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